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Accounting, Vol. 1, Cdn. 10e (Horngren)
Chapter 6 Accounting for Merchandise Inventory
Objective 6-1
1) All balance sheets have inventory listed as an asset.

Answer: FALSE
Diff: 1 Type: TF
CPA Competency: 1.2.2 Evaluates treatment for routine transactions
Objective: 6-1 Account for perpetual inventory under specific-unit-cost, FIFO, and weighted-average-cost methods
Knowledge Taxon.: Factual
Cognitive Taxon.: Remember
2) The two main types of inventory systems are the perpetual system and the periodic system.
Answer: TRUE
Diff: 1 Type: TF
3) Gross margin is the excess of net sales revenue over cost of goods sold.
Answer: TRUE
Diff: 1 Type: TF
4) The inventory costing method used must match the physical flow of goods in and out of inventory.
Answer: FALSE
Diff: 2 Type: TF
Cognitive Taxon.: Understand
5) Under moving-weighted-average cost method, the cost of goods sold is based on the oldest purchases.
Answer: FALSE
Diff: 2 Type: TF
6) It is necessary to do a physical count of inventory when using a perpetual inventory system.

Answer: TRUE
Diff: 2 Type: TF
7) Measuring the cost of inventory is difficult when prices are constant.
Answer: FALSE
Diff: 1 Type: TF
Knowledge Taxon.: Conceptual
8) FIFO costing is consistent with the physical movement of inventory for many companies.
Answer: TRUE
Diff: 1 Type: TF
9) The specific-unit-cost method is useful for inventory items that have common characteristics, such as
tonnes of ore or litres of paint.
Answer: FALSE
Diff: 2 Type: TF
10) The specific-unit-cost method is useful for inventory items that have a distinctive identity.
Answer: TRUE
Diff: 2 Type: TF
11) Under the FIFO method, ending inventory is valued based on the most recent purchases.
Answer: TRUE
Diff: 2 Type: TF
12) Under the perpetual system, ending inventory and cost of goods sold will be the same when FIFO
inventory costing method is used.
Answer: FALSE
Diff: 2 Type: TF
13) In a perpetual inventory system, recording a sale also includes a corresponding journal entry to
record the inventory reduction.
Answer: TRUE
Diff: 2 Type: TF
Cognitive Taxon.: Apply
14) A FIFO perpetual inventory system:

A) assigns the most recent costs to ending inventory.
B) assigns the most recent costs to cost of goods sold when goods are sold.
C) reports the oldest costs for ending inventory values.
D) does not match the typical physical flow of goods.
Answer: A
Diff: 1 Type: MC
15) Inventory is classified:

A) as a property, plant, and equipment asset on the balance sheet.
B) as a current asset on the balance sheet.
C) as a current liability on the balance sheet.
D) as either an investment or a current asset on the balance sheet.
Answer: B
Diff: 2 Type: MC
16) A perpetual inventory system:

A) keeps a running record of all goods.
B) can be maintained only with computer software.
C) is used only for inexpensive goods.
D) does not required a physical count at the end of the fiscal year.
Answer: A
Diff: 2 Type: MC
17) Which of the following is not an acceptable inventory cost method?
A) first-in, first-out
B) last-out, first-in
C) specific-unit-cost
D) weighted-average cost
Answer: B
Diff: 2 Type: MC
18) If inventory items may be identified individually, the business could easily use this method of
inventory costing:
A) average cost.
B) specific-unit-cost.
C) FIFO.
D) weighted-average cost.
Answer: B
Diff: 2 Type: MC
19) Which of the following methods represents the most accurate cost?
A) FIFO
B) specific-unit-cost
C) average cost
Answer: B
Diff: 2 Type: MC
20) A jeweller selling unique, high-priced items of jewellery would most likely use which method of
inventory costing?
A) FIFO
B) average cost
C) specific-unit-cost
Answer: C
Diff: 2 Type: MC
21) Refer to Table 6-1. Assume a perpetual inventory system and all sales occurred prior to October 30th.
Under the FIFO method, cost of goods sold on the income statement would be:
A) $375.
B) $537.
C) $162.
D) $420.
Answer: A
Explanation: A) [(10 × $7) + (15 × $9) + (17 × $10)] = $375
Diff: 2 Type: MC
Knowledge Taxon.: Procedural
22) Which of the following inventory costing methods requires a company to keep track of the actual
physical movement of individual inventory items?
A) specific-unit-cost
B) weighted-average cost
C) FIFO
D) average cost
Answer: A
Diff: 2 Type: MC
23) Using the perpetual inventory method, what is the weighted-average cost of ending inventory
rounded to the nearest whole dollar?
Sales revenue 100 units at $10 per unit

Beginning inventory 50 units at $8 per unit
Purchases 90 units at $9 per unit
A) $400
B) $360
C) $346
D) $864
Answer: C
Diff: 2 Type: MC
24) When the FIFO method is used, ending inventory is assumed to consist of the:
A) oldest units.
B) most recently purchased units.
C) units with the highest per unit cost.
D) units with the lowest per unit cost.
Answer: B
Diff: 1 Type: MC
25) When the FIFO method of inventory valuation is used, cost of goods sold is assumed to consist of the:
A) most recently purchased units.
B) most expensive units.
C) least expensive units.
D) oldest units.
Answer: D
Diff: 1 Type: MC
26) If a company uses a perpetual inventory system, it will maintain all the following accounts except:
A) cost of goods sold.
B) inventory.
C) sales.
D) purchases.
Answer: D
Diff: 2 Type: MC
27) The adjusting entry at year end under a perpetual inventory system to record cost of goods sold
includes a:
A) debit to cost of goods sold and a credit to inventory for the ending balance of inventory.
B) debit to purchases and a credit to cost of goods sold for the beginning balance of purchases.
C) debit to cost of goods sold and a credit to inventory for the beginning balance of inventory.
D) No adjusting entry is required under a perpetual inventory system to adjust the beginning and ending
balances.
Answer: D
Diff: 2 Type: MC
Table 6-4
Assume the following data for Burnette Sales for 2014:
Beginning inventory 10 units at $7 each

March 18 purchase 15 units at $9 each
Sale 20 units at $15 each
June 10 purchase 20 units at $10 each
October 30 purchase 12 units at $11 each
On December 31, a physical count reveals 15 units on hand.
28) Refer to Table 6-4. Under the FIFO method (assuming a perpetual inventory system), ending
inventory would be valued at:
A) $162.
B) $105.
C) $115.
D) $135.
Answer: A
Diff: 2 Type: MC
29) Refer to Table 6-4. Assume a perpetual system. Under the moving-weighted-average-cost method, the
cost of goods sold for the first sale (20 units) would be valued at:
A) $164.
B) $105.
C) $115.
D) $135.
Answer: A
Diff: 2 Type: MC
30) Refer to Table 6-4. Assume a perpetual inventory system. Under FIFO method, the cost of goods sold
for the second sale (12 units) would be calculated as:
A) $165.
B) $105.
C) $115.
D) $135.
Answer: C
Diff: 2 Type: MC
Table 6-6 Sam's Wholesale Bikes
January 1 inventory balance 15 units at $350 per unit

January 4 purchase 50 units at $375 per unit
January 15 sale 40 units at $550 per unit
February 8 purchase 80 units at $405 per unit
February 15 sale 70 units at $550 per unit
31) Refer to Table 6-6. What is the cost of goods sold for the two months assuming that Sam's uses the
perpetual FIFO inventory method?
A) $42,225
B) $56,400
C) $48,900
D) $38,900
Answer: A
Explanation: A) (15 × $350) + (50 × $375) + (45 × $405) = $42,225
Diff: 2 Type: MC
32) Refer to Table 6-6. What is the value of the February ending inventory assuming that Sam's uses the
perpetual FIFO inventory method?
A) $7,500
B) $17,500
C) $14,175
D) $15,875
Answer: C
Explanation: C) 35 × $405 = $ 14,175
Diff: 2 Type: MC
33) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam's uses the
perpetual inventory FIFO inventory method?
A) $18,275
B) $4,100
C) $11,600
D) $21,600
Answer: A
Explanation: A) $60,500 - $42,225 = $18,275
Diff: 2 Type: MC
perpetual weighted-average inventory method?
A) $38,772
B) $42,523
C) $49,700
D) $46,996
Answer: B
Explanation: B)
Jan 1 15 × $350 = $5,250
Jan 4 50 × $375 = 18,750
65 $24,000 Avg. = $369.23
Jan 15 (40) × $369.23 (14,769)
25 $9,231
Feb 8 80 × $405 32,400
105 $41,631 Avg. = $396.49
Feb 15 (70) × $396.49 (27,754)
35 $13,877
Cost of goods sold = $14,769 + $27,754 = $ 42,523

Diff: 2 Type: MC
perpetual weighted-average inventory method?
A) $13,877
B) $17,628
C) $6,700
D) $9,404
Answer: A
Diff: 2 Type: MC
36) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam's uses the
perpetual inventory weighted-average-cost method?
A) $13,504
B) $21,728
C) $10,800
D) $17,977
Answer: D
Diff: 2 Type: MC
37) The following data pertain to Cross Company (assume a perpetual inventory system) for the month
ended January 31, 2013:
Date Description Units Unit Cost Unit Selling Price
Jan.1 Beg. Inventory 10 $50

5 Purchase 25 52
10 Sale (6) $80
16 Sale (10) 82
20 Purchase 12 55
25 Sale (20) 85
Required:
1. Compute the cost of goods sold and ending inventory under FIFO.
2. Compute Gross Margin under FIFO
Answer:
1. Cost of Goods Sold:
10 × $50 = $500
25 × $52 = 1,300
1 × $55= 55
$1,855
Ending inventory: 11 × $55 = $605
2. Gross Margin:
Sales (6 × $80) + (10 × $82) + (20 × $85) $3,000
COGS 1,855
$1,145
Diff: 2 Type: ES
38) The Snowboarding Company provided the following information for one of its top-selling
snowboards:
Date Item Units Amount

Nov.1Beginning inventory 26 $197
5 Sale (12) 300
12 Purchase 65 210
16 Sale (50) 305
19 Purchase 38 215
22 Sale (62) 310
26 Purchase 40 216
Required:
1. Calculate the cost of goods sold using moving-weighted-average, assuming a perpetual inventory
system.
2. Calculate the ending inventory using a weighted-average assuming a periodic inventory system.
Answer:
Cost of Goods Sold Balance
1. 26 × $197= $5,122
(12) × $197 = $2,634 ($2,364)
14 × $197 $2,758
65 × $210 = 13,650
79 $16,408
16,408/79 = $208
(50) × $208 10,400 (10,400)
29 $6,008
38 × $215 8,170
67 14,178
14,178/67=$212
(62) × $212 13,144 (13,144)
5 26,178 1,034
40 × $216 8,640
45 9,674
2. Total units = 26 + 65 + 38 + 40 = 169

Total Cost = $5,122 + 13,650 + 8,170 + 8,640 = $35,582
Weighted-average = $35,583/169
= $211.
Ending Inventory in units = 169 - [(12 + 50 + 62)]
= 169 - 124
= 45
Total cost of Ending Inventory = 45 × $211 = $9,495
Diff: 3 Type: ES
Table 6-5
Assume the following data for Kruger Sales for November 2013:
Beginning inventory Nov. 1 5 units at $90 each

Sale Nov. 3 3 units at $120 each
Nov. 6 purchase 11 units at $95 each
On November 30, a physical count reveals 6 units on hand.
39) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the perpetual moving-
weighted-average-cost method is being used.
Answer: Received Sold Balance
Qty. Cost Amt. Qty. Cost Amt. Qty. Cost Amt.
Nov. 1 5 90 450 5 90 450

Nov. 3 3 90 270 2 90 180
Nov. 6 11 95 1,045 13 94.23 1,225
Nov. 8 4 94.23 377 9 94.23 848
Nov. 9 3 94.23 283 6 94.23 565
Cost of goods sold 930
Ending inventory 565
Diff: 3 Type: ES
40) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the perpetual moving-weighted-
average-cost method is being used.
Qty. Cost Amt. Qty. Cost Amt. Qty. Cost Amt.
Nov. 1 5 90 450 5 90 450

Nov. 3 3 90 270 2 90 180
Nov. 6 11 95 1,045 13 94.23 1,225
Nov. 8 4 94.23 377 9 94.23 848
Nov. 9 3 94.23 283 6 94.23 565
Sales
Nov. 3 3
Nov. 8 4
Nov. 9 3
10 × 120 = $1,200
Cost of goods sold:

Cost of goods available 1,495
Less ending inventory (565)
Gross margin 270
Diff: 3 Type: ES
41) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the perpetual FIFO cost
method is being used.
Date Qty. Cost Amt. Qty. Cost Amt. Qty. Cost Amt.
Nov. 1 5 90 450 5 90 450

Nov. 3 3 90 270 2 90 180
Nov. 6 11 95 1,045 2 90 180
11 95 1,045
13 1,225
Nov. 8 2 90 180
2 95 190
4 370 9 95 855
Nov. 9 3 95 285 6 95 570

Diff: 2 Type: ES
42) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the perpetual FIFO cost method
is being used.
Date Qty. Cost Amt. Qty. Cost Amt. Qty. Cost Amt.
Nov. 1 5 90 450 5 90 450

Nov. 3 3 90 270 2 90 180
Nov. 6 11 95 1,045 2 90 180
11 95 1,045
13 1,225
Nov. 8 2 90 180
2 95 190
4 370 9 95 855
Nov. 9 3 95 285 6 95 570

Sales
Nov. 3 3
Nov. 8 4
Nov. 9 3
10 × 120 = $1,200
Cost of goods sold:

Gross margin 275
Diff: 2 Type: ES
43) Sam Levine Merchandising had the following transactions during May:
May 1 Beginning inventory was 20 units valued at $25 per unit.

May 5 Purchased 80 units of merchandise on account for $2,160,
terms n/15, FOB shipping point.
May 9 Paid transportation cost on the May 5 purchase, $240.
May 10 Returned two units of defective merchandise purchased on May 5.
May 11 Sold 30 units for $50 per unit on account.
May 15 Paid for the May 5 purchase, less the return .
May 20 Sold 10 units for $50 per unit on account.
Required:
1. Assuming FIFO and that the perpetual inventory system is used, prepare the journal entries to record
the above transactions.
2. Assuming weighted-average and that the periodic inventory system is used, prepare the journal
entries to record the above transactions.
Answer:
Requirement 1: Perpetual Inventory Method
Date Account Name Debit Credit

May 5 Inventory 2,160
Accounts Payable 2,160
May 9 Inventory 240

Cash 240
May 10 Accounts Payable 54

Inventory 54
May 11 Accounts Receivable (30 × $50) 1,500

Sales 1,500
Cost of Goods Sold (20 × $25) + (10 × ($27 + $3)) 800
Inventory 800
May 15 Accounts Payable ($2,160 - $54) 2,106

Cash 2,106
May 20 Accounts receivable 500

Sales 500
Cost of Goods Sold (10 × $30) 300

Inventory 300
Requirement 2: Periodic Inventory Method
Date Account Name Debit Credit

May 5 Purchases 2,160
Accounts Payable 2,160
May 9 Freight-in 240

Cash 240
May 10 Accounts Payable 54

Purchase Returns 54
May 11 Accounts Receivable 1,500

Sales 1,500
May 15 Accounts Payable 2,160

Cash 2,160
May 20 Accounts Receivable 500

Sales 500
Diff: 3 Type: ES
Cognitive Taxon.: Evaluate
44) Jan-Con Company provides the following information for the month of August.
Date Units $/Unit Total

Aug 1 Opening inventory 40 $ 30 $1,200
Aug 3 Purchase 60 $ 35 $2,100
Aug 10 Sale 100 $ 60 $6,000
Aug 22 Purchase 90 $ 40 $3,600
Aug 24 Sale 70 $ 70 $4,900
Required:
(a) What is the value of the ending inventory assuming the company uses a periodic inventory system
and the weighted-average method?
(b) What is the cost of goods sold if the company uses a perpetual inventory system and the FIFO
method of valuing inventory?
(c) What is the cost of goods sold if the company uses a perpetual inventory system and the weighted
average method of valuing inventory?
Answer:
Units available 190

Units sold 170
Ending inventory 20
Average cost = $6,900/190 = $36.32
Ending inventory = 20 units * $36.32 = $726.40
Aug 10th COGS = (40 units ∗ $30) + (60 units ∗ $35) = $3,300.00
Aug 22nd COGS = (70 units ∗ $40) =
2,800.00
$6,100.00
Aug 10th COGS = ∗ 100 = $3,300.00
Aug 22nd COGS = ∗ 70 = 2,800.00
$6,100.00
Diff: 3 Type: ES
45) Sam's Corner Store has the following purchase and sales information for one of their inventory items:
Feb 1 Opening inventory 10 $8 $80
Feb 9 Purchase 25 $9 $225
Feb 15 Sale 15 $15 $225
Feb 25 Sale 10 $16 $160
Required:
For (a) and (b) assume the company uses the periodic inventory system.
(a) Calculate the gross profit if the company uses first-in, first-out (FIFO)
(b) Calculate the value of the ending inventory if the company uses weighted average.
For (c) and (d) assume the company uses the perpetual inventory system.
(c) What is the cost of goods sold for the Feb 25 sale if the company uses weighted average to cost the
inventory?
(d) What is the value of the ending inventory if the company uses FIFO?
Answer: For (a) and (b) assume the company uses the periodic inventory system.
Units available to sell 55

Units sold (25)
Ending inventory 30
Sales [(15 ∗ $15) + (10 ∗ $16)] = $385

Cost of goods sold:
Beginning inventory $80
Purchases [(25 ∗ $9) + (20 ∗ $11)] 445
Goods available $525
Less: ending inventory (20 ∗ $11)+(10 ∗ $9) (310)
Gross margin $170
Weighted average cost per unit = $ 525/55 units = $ 9.55
Ending inventory = 30 units ∗ $9.55 = $286.50
inventory?
Feb 15 sale weighted average:
Beginning inventory 10 ∗ $8.00 = $80

Feb 9 purchase 25 ∗ $9.00 = 225
Total 35 $305
Average cost = $305/35 = $ 8.71

Cost of goods sold = 15 ∗ $8.71 = $130.65
Remaining units = 35 - 15 = 20
Units remaining Apr 15 20 ∗ $8.71 = 174.20

Feb 17 purchase 20 ∗ $11.00 = 220.00
Total 40 394.20
Average cost = $394.20/40 = $ 9.86

Cost of goods sold = 10 * $9.86 = $98.60
(20 units ∗ $11.00) + (10 units ∗ $9) = $310

Diff: 3 Type: ES
Objective 6-2
1) FIFO will report the lowest cost of goods sold on the income statement when prices are falling.
Answer: FALSE
Diff: 3 Type: TF
Objective: 6-2 Compare the effects of the FIFO and moving-weighted-average-cost methods
2) FIFO results in a more accurate portrayal of ending inventory on the balance sheet than does moving-
weighted-average.
Answer: FALSE
Diff: 3 Type: TF
3) Moving-weighted-average matches cost of goods sold to sales on the income statement better than
FIFO.
Answer: FALSE
Diff: 3 Type: TF
4) The FIFO method can result in misleading inventory costs on the balance sheet because the oldest
prices are left in ending inventory.
Answer: FALSE
Diff: 2 Type: TF
5) When inventory costs are rising, FIFO results in the highest cost of goods sold and the lowest gross
margin.
Answer: FALSE
Diff: 3 Type: TF
6) The moving-weighted-average-cost method generates a gross margin that will be lower than the gross
margin generated under FIFO costing when prices are rising.
Answer: TRUE
Diff: 3 Type: TF
7) When prices are rising, the ending inventory balance reported on a weighted-average basis is
generally:
A) lower than on a FIFO basis.
B) greater than on a FIFO basis.
C) equal to ending inventory reported on a FIFO basis.
D) equally likely to be higher or lower on a weighted-average basis as opposed to a FIFO basis.
Answer: A
Diff: 3 Type: MC
8) When prices are rising, the cost of goods sold on the income statement reported on a weighted-average
basis is generally:
B) equal to ending inventory reported on a FIFO basis.
C) greater than on a FIFO basis.
Answer: C
Diff: 3 Type: MC
9) When prices are falling, the ending inventory balance reported on a FIFO basis is generally:
A) lower than on a weighted-average basis.
B) greater than on a weighted-average basis.
C) equal to ending inventory reported on a weighted-average basis.
Answer: A
Diff: 3 Type: MC
10) When prices are falling, the cost of goods sold reported on the income statement on a weighted-
average basis is generally:
B) greater than on a FIFO basis.
C) equal to ending inventory reported on a FIFO basis.
Answer: A
Diff: 3 Type: MC
11) When inventory prices are rising, the FIFO method will generally yield a gross margin that is:
A) less than the weighted average method.
B) equal to the gross margin of the weighted-average method.
C) higher than the weighted-average method.
D) FIFO does not generally cause a gross margin that is different from that of any other costing method.
Answer: C
Diff: 3 Type: MC
12) When inventory prices are declining, the FIFO method will generally yield a gross margin that is:
A) less than the weighted-average method.
B) equal to the gross margin of the weighted-average method.
C) higher than the weighted-average method.
D) FIFO does not generally cause a gross margin that is different from that of any other costing method.
Answer: A
Diff: 3 Type: MC
13) When inventory prices are rising, the weighted-average method will generally result in a:
A) higher gross margin than FIFO.
B) lower ending inventory value than FIFO.
C) higher owner's equity balance than FIFO.
D) lower cost of goods sold than FIFO.
Answer: B
Diff: 3 Type: MC
14) When inventory prices are declining, the weighted-average method will generally result in a:
A) lower gross margin than FIFO.
B) higher ending inventory value than FIFO.
C) lower owner's equity balance than FIFO.
D) higher cost of goods sold than FIFO.
Answer: B
Diff: 3 Type: MC
15) State which inventory method would best meet the specific goal of management stated below. Show
your answer by inserting the proper letter beside each statement.
a) FIFO
b) Specific-unit-cost
c) Weighted-average
1) Management desires to precisely match cost of goods sold

with net sales revenue. ________
2) Management desires to minimize the company's ending
inventory balance during a period of falling prices. ________
3) The company sells rare, antique items. ________
4) Management desires to show the current value inventory
on the balance sheet. ________
5) Management desires to maximize the company's
gross margin during a period of rising prices. ________
Answer:
1) b
2) a
3) b
4) a
5) a
Diff: 2 Type: SA
16) Identify the inventory method—FIFO, weighted-average, or specific-unit cost—most likely used for
the following situations.
a) results in ending inventory close to current cost

of replacing inventory ________
b) precisely matches cost of goods sold against sales revenue ________
c) used to account for inventory of automobiles ________
d) Usually the best method to maximize gross margin
when prices are rising ________
e) provides a middle-ground measure of ending inventory
and cost of goods sold ________
f) generally tends to maximize net income when prices are rising ________
Answer:
a) FIFO
b)specific-unit cost
c) specific-unit cost
d) FIFO
e) weighted-average
f) FIFO
Diff: 2 Type: SA
17) Compare the effects of the FIFO and moving-weighted-average-cost methods on the value of ending
inventory and cost of goods sold. Then contrast the methods when purchase prices are rising.
Answer: FIFO costing reports ending inventory at the most current cost. Moving-weighted-average
costing reports ending inventory and cost of goods sold at an average amount determined by the value of
all relevant units in inventory. When prices are rising, moving-weighted-average costing produces the
higher cost of goods sold and therefore the lower gross margin, the reverse is true for FIFO. The effect
will balance out in the following year as the difference in ending inventory cost for each method becomes
a corresponding difference in beginning inventory resulting in the opposite effect.
Diff: 3 Type: ES
Knowledge Taxon.: Metacognitive
Objective 6-3
1) Under either the periodic or the perpetual system, ending inventory will be the same when FIFO
inventory costing method is used.
Answer: TRUE
Diff: 2 Type: TF
Objective: 6-3 Account for periodic inventory under FIFO and weighted-average-cost methods
2) The disclosure principle of accounting requires that a business reveal to the user of the financial
statement the method used to value inventory.
Answer: TRUE
Diff: 2 Type: TF
3) The materiality concept of accounting allows a business to expense the cost of freight-in rather than
add it to the cost of the inventory on the basis that the difference in the accounting treatment would not
sway a decision by a financial statement user.
Answer: TRUE
Diff: 2 Type: TF
4) Once an inventory method is selected by a business, the consistency characteristic of accounting would
require that this method be used from year to year.
Answer: TRUE
Diff: 1 Type: TF
5) The lower-of-cost-and-net-realizable-value rule is an application of the consistency principle.

Answer: FALSE
Diff: 1 Type: TF
6) Using the FIFO method, the earliest purchases of inventory are assumed to be contained:
A) on the balance sheet as part of ending inventory.
B) on the income statement as part of cost of goods sold.
C) equally split between the income statement and the balance sheet.
D) majority on the income statement and minority on the balance sheet.
Answer: B
Diff: 3 Type: MC
Table 6-1
Assume the following data for Burnette Merchandising for 2014:
Beginning inventory 10 units at $7 each

June 10 purchase 20 units at $10 each
October 30 purchase 12 units at $11 each
On December 31, a physical count reveals 15 units in ending inventory.
7) Refer to Table 6-1. Assume a periodic inventory system. Under the FIFO method, ending inventory
would be valued at:
A) $165.
B) $105.
C) $162.
D) $135.
Answer: C
Explanation: C) (12 × $11) + (3 × $10) = $162
Diff: 2 Type: MC
8) Refer to Table 6-1. Assume a periodic inventory system. Under the weighted-average method, cost of
goods sold on the income statement would be:
A) $397.
B) $294.
C) $389.
D) $420.
Answer: A
Explanation: A) [(10 × $7) + (15 × $9) + (20 × $10) + (12 × $11)]/57 units = $9.42
$9.42 × (57 - 15) = $396.64
Diff: 2 Type: MC
9) Refer to Table 6-1. Assume a periodic inventory system. Under the FIFO method, cost of goods sold on
the income statement would be:
A) $294.
B) $375.
C) $462.
D) $420.
Answer: B
Explanation: B) [(10 × $7) + (15 × $9) + (17 × $10)] = $375
Diff: 2 Type: MC
10) Given the following data, what is the cost of goods sold rounded to the nearest whole dollar using
periodic FIFO?

A) $400
B) $360
C) $890
D) $850
Answer: D
Diff: 2 Type: MC
11) Given the following data, what is the cost of ending inventory rounded to the nearest whole dollar
using periodic FIFO?

A) $400
B) $360
C) $890
D) $850
Answer: B
Diff: 2 Type: MC
12) Given the following data, what is the gross margin if cost of goods sold is determined using the FIFO
periodic method?

A) $2,540
B) $1,460
C) $1,400
D) $1,390
Answer: B
Diff: 2 Type: MC
13) Given the following data, what is the value of ending inventory if the FIFO periodic method is used?

A) $1,400
B) $840
C) $910
D) $1,600
Answer: C
Diff: 2 Type: MC
14) Given the following data, what is the gross margin if cost of goods sold is determined using the
weighted-average method?

A) $2,556
B) $1,444
C) $2,500
D) $1,500
Answer: B
Diff: 2 Type: MC
Table 6-2

March 2 purchase 50 units at $11 per unit
July 8 purchase 80 units at $10 per unit
November 15 purchase 30 units at $12 per unit
On December 31, a physical count reveals 80 units in ending inventory.
15) Referring to Table 6-2, the cost of ending inventory using the periodic FIFO method would be:
A) $1,910.
B) $860.
C) $800.
D) $850.
Answer: B
Explanation: B) (30 × $12) + (50 × $10) = $860
Diff: 2 Type: MC
16) Referring to Table 6-2, cost of goods sold calculated under the periodic FIFO method would be:
A) $1,800.
B) $2,160.
C) $1,910.
D) $1,850.
Answer: D
Explanation: D) [(100 × $10) + (50 × $11) + (30 × $10)] = $1,850
Diff: 2 Type: MC
17) Referring to Table 6-2, assuming all goods are sold throughout the year for $17 per unit, gross margin
calculated under the periodic FIFO method would be:
A) $1,210.
B) $1,260.
C) $1,150.
D) $900.
Answer: A
Explanation: A) (180 × $17) - [(100 × $10) + (50 × $11) + (30 × $10)] = $1,210
Diff: 2 Type: MC
18) Referring to Table 6-2, assuming all goods are sold throughout the year for $19 per unit, gross margin
calculated under the periodic FIFO method would be:
A) $1,620.
B) $1,510.
C) $1,260.
D) $1,570.
Answer: D
Explanation: D) (180 × $19) - [(100 × $10) + (50 × $11) + (30 × $10)] = $1,570
Diff: 2 Type: MC
19) Referring to Table 6-2, the cost of ending inventory using the periodic weighted-average-cost method
rounded to the nearest whole number would be:
A) $1,910.
B) $860.
C) $834.
D) $850.
Answer: C
Explanation: C) {[(100 × $10) + (50 × $11) + (80 × $10) + (30 × $12)]/260} × 80 = $833.85
Diff: 2 Type: MC
20) Which statement addresses the consistency characteristic of accounting information?

A) Companies in the same industry must use the same inventory costing method to facilitate comparison
of results.
B) Financial reporting practices in one country should be consistent with those in other countries.
C) Businesses should generally use the same accounting methods and procedures from one period to the
next.
D) Once a company selects an inventory costing method, it must always use that method.
Answer: C
Diff: 2 Type: MC
21) Which of the following statements is true about a company making an accounting change in its
financial statements?
A) It must disclose the effect of the change on net income.
B) It is generally entitled to make one accounting change per year.
C) Companies can never make accounting changes because of the consistency characteristic.
D) Management must ask permission from the federal government.
Answer: A
Diff: 2 Type: MC
22) An item is considered material if:
A) it facilitates comparison with the financial statements of another company in the same industry.
B) its inclusion in the financial statements would cause a statement user to change a decision.
C) its dollar value is greater than 10% of net income.
D) it is accounted for using a treatment that is not normally allowed by generally accepted accounting
principles.
Answer: B
Diff: 2 Type: MC
23) If a company uses periodic inventory and FIFO when prices are falling, the effect will:
A) reduce cost of goods sold.
B) increase the inventory ending balance on the balance sheet.
C) reduce the gross margin.
D) increase the gross margin.
Answer: C
Diff: 2 Type: MC
24) The perpetual and periodic inventory systems will produce identical cost of goods sold and ending
inventory balances using which of the following cost flow assumptions?
A) FIFO
B) average
C) weighted-average
D) just in time
Answer: A
Diff: 2 Type: MC
25) If a company uses a periodic inventory system, which of the following entries is required to record the
sale of merchandise on credit?
A)
Accounts Receivable
Sales Revenue
B)
Purchases
Cost of Goods Sold
C)
Cost of Goods Sold
Purchases
D)
Accounts Payable
Sales Revenue
Answer: A
Diff: 2 Type: MC
26) Given the following data, what is cost of goods sold?
Sales revenue $950,000

Beginning inventory 150,000
Ending inventory 230,000
Purchases 720,000
A) $870,000
B) $640,000
C) $570,000
D) $510,000
Answer: B
Diff: 1 Type: MC
27) Given the following data, what is gross margin?

Purchases 720,000
A) $150,000
B) $640,000
C) $570,000
D) $310,000
Answer: D
Diff: 1 Type: MC
28) The journal entry to sell merchandise under a periodic inventory system includes a:
A) debit to cost of goods sold.
B) debit to inventory.
C) credit to purchases.
D) credit to sales revenue.
Answer: D
Diff: 1 Type: MC
29) The journal entry to purchase merchandise under a periodic inventory system includes a:
A) debit to cost of goods sold.
B) debit to inventory.
C) credit to purchases.
D) debit to purchases.
Answer: D
Diff: 1 Type: MC
30) One scheme for using inventory to increase reported income is to:
A) overstate ending inventory.
B) understate ending inventory.
C) overstate cost of goods sold.
D) overstate purchases.
Answer: A
Diff: 2 Type: MC
Table 6-6 Sam's Wholesale Bikes

January 4 purchase 50 units at $375 per unit
January 15 sale 40 units at $550 per unit
February 8 purchase 80 units at $405 per unit
February 15 sale 70 units at $550 per unit
periodic FIFO inventory method?
A) $42,225
B) $56,400
C) $48,900
D) $38,900
Answer: A
Diff: 2 Type: MC
periodic FIFO inventory method?
A) $7,500
B) $17,500
C) $14,175
D) $15,875
Answer: C
Diff: 2 Type: MC
33) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam's uses the periodic
inventory FIFO inventory method?
A) $4,100
B) $21,600
C) $11,600
D) $18,275
Answer: D
Explanation: D) $60,500 - $42,225 = $18,275
Diff: 2 Type: MC
periodic weighted-average inventory method?
A) $42,787
B) $45,797
C) $38,992
D) $43,555
Answer: A
Explanation: A) Available $/Available units = $56,400/145 = $ 388.97
110 × $ 388.97 = $42,787
Diff: 2 Type: MC
periodic weighted-average inventory method?
A) $12,845
B) $17,408
C) $13,614
D) $10,603
Answer: C
Explanation: C) Available $/Available units = $56,400/145 = $ 388.97
(145-110) × $ 388.97 = $13,614
Diff: 2 Type: MC
36) Refer to Table 6-6. What is the gross margin for the two months assuming that Sam's uses the periodic
inventory weighted-average inventory method?
A) $14,703
B) $16,945
C) $17,713
D) $21,508
Answer: C
Explanation: C) $60,500 - $42,787 = $17,713
Diff: 2 Type: MC
37) The cost of goods available for sale is equal to the:

A) cost of goods sold minus the ending inventory.
B) sales revenues minus the cost of goods sold.
C) cost of goods sold plus the ending inventory.
D) ending inventory plus the sales revenues.
Answer: C
Diff: 1 Type: MC
38) The following data pertain to Stratus Company for the year ended December 31, 2014:
Beginning inventory balance $245,500

Purchases of inventory on credit during year 570,000
Sales (40% on credit) during year 780,000
Cost of goods sold during year 550,000
Required:
1. Calculate the value of ending inventory on December 31, 2014.
2. Determine the gross margin
Answer:
1. Beginning inventory $245,500
Purchases 570,000
Cost of Goods Available $815,500
Less: Cost of Goods Sold 550,000
Ending Inventory $265,500
2. Gross Margin = Sales - Cost of Goods Sold

= $780,000 - 550,000
= $230,000
Diff: 2 Type: ES
Cognitive Taxon.: Analyze
39) The following data are available for the month of April for Gore Company:
April 1 inventory 120 units at $8.15 each

April 10 purchase 200 units at $8.20 each
Gore sold 630 units during April.

Compute the value of ending inventory under FIFO. Assume a periodic inventory system.
Answer: (310 × $8.50) + (100 × $8.40) = $2,635 + $840 = $3,475
Diff: 2 Type: ES
40) The following data are available for the month of April for Gore Company:
April 1 inventory 120 units at $8.15 each

Gore sold 630 units during April.
Compute the value of ending inventory under the weighted-average method. Assume a periodic
inventory system.(round per unit cost to the nearest cent, round final answer to the nearest dollar)
Answer:
(120 × $8.15) + (200 × $8.20) + (410 × $8.40) + (310 × $8.50)
= $978 + $1,640 + $3,444 + $2,635
= $8,697/1,040 units = $8.36 average cost per unit
$8.36 × 410 = $3,428

Diff: 2 Type: ES
41) The following data are available for the month of March:
March 1 balance 20 units at $15 each

March 17 purchase 30 units at $17.50 each
On March 31, 35 units are on hand.
Calculate cost of goods sold under the following methods:
a) FIFO b) weighted-average (round per unit cost to the nearest cent, round final answer to the nearest
dollar, assume periodic inventory system)
Answer: 115 units available - 35 ending units = 80 units sold
a) (20 × $15) + (40 × $16) + (20 × $17.50) = $300 + $640 + $350 = $1,290
b) (20 × $15) + (40 × $16) + (30 × $17.50) + (25 × $18) = $300 + $640 + $525 + $450 = $1,915
$1,915/115 units = $16.65 × 80 = $1,332
Diff: 2 Type: ES
42) Engle Enterprises reports net sales revenue for 2013 to be $595,000, January 1, 2013 inventory at
$102,000, net purchases at $370,000, and operating expenses at $155,000. Under FIFO, December 31, 2013,
inventory would be valued at $96,700.
Compute net income for 2013.

Answer:
Net sales revenue $595,000
Cost of goods sold
Net purchases 370,000
Cost of goods available for sale 472,000
Cost of goods sold 375,300
Gross margin 219,700
Operating expenses 155,000
Net income $64,700
Diff: 2 Type: ES
Table 6-5
Assume the following data for Kruger Sales for November 2013:
Beginning inventory Nov. 1 5 units at $90 each

Nov. 6 purchase 11 units at $95 each
On November 30, a physical count reveals 6 units on hand.
43) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the weighted-average-cost
method is being used and a periodic inventory system.
Answer:
Cost of Goods Available: Qty. Cost Amt.
Nov. 1 Beginning Bal. 5 90 450
Nov. 6 Purchase 11 95 1,045
Goods Available 16 1,495
Weighted Average: = 93.44
Ending Inventory = 6 units × 93.44 = 561
Diff: 2 Type: ES
44) Refer to Table 6-5. Calculate gross margin for Kruger Sales assuming the weighted-average cost
method is being used and a periodic inventory system.
Answer:
Weighted Average: = 93.44
Ending Inventory = 6 units × 93.44 = 561
Sales
Nov. 3 3
Nov. 8 4
Nov. 9 3
10 × 120= $1,200
Cost of goods sold:

Gross profit 266
Diff: 2 Type: ES
45) Refer to Table 6-5. Calculate ending inventory for Kruger Sales assuming the periodic FIFO cost
method is being used.
Answer:
Ending Inventory = 6 units × 95 = $570

Diff: 2 Type: ES
46) Refer to Table 6-5. Calculate gross profit for Kruger Sales assuming the periodic FIFO cost method is
being used.
Answer:
Ending Inventory = 6 units × 95 = 570
Sales
Nov. 3 3
Nov. 8 4
Nov. 9 3
10 × 120 = $1,200
Cost of goods sold:

Gross profit 275
Diff: 2 Type: ES
47) Jan-Con Company provides the following information for the month of August.

Aug 1 Opening inventory 40 $30 $1,200
Aug 3 Purchase 60 $35 $2,100
Aug 10 Sale 100 $60 $6,000
Aug 22 Purchase 90 $40 $3,600
Aug 24 Sale 70 $70 $4,900
Required:
Answer:
Units available 190

Units sold 170
Ending inventory 20
Average cost = $6,900/190 = $36.32
Aug 10th COGS = (40 units ∗ $30) + (60 units ∗ $35) = $3,300.00
Aug 22nd COGS = (70 units ∗ $40) = 2,800.00
$6,100.00
Aug 10th COGS = ∗ 100 = $3,300.00
Aug 22nd COGS = ∗ 70 = 2,800.00
$6,100.00
Diff: 3 Type: ES
48) Sam's Corner Store has the following purchase and sales information for one of their inventory items:

Feb 1 Opening inventory 10 $8 $80
Feb 15 Sale 15 $15 $225
Feb 25 Sale 10 $16 $160
Required:
For (a) and (b) assume the company uses the periodic inventory system.
inventory?
Answer: For (a) and (b) assume the company uses the periodic inventory system.
Units available to sell 55

Units sold (25)
Ending inventory 30
Sales [(15 ∗ $15) + (10 ∗ $16)] = $385

Cost of goods sold:
Beginning inventory $80
Purchases [(25 ∗ $9) + (20 ∗ $11)] 445
Goods available 525
Less: ending inventory (20 ∗ $11) + (10 ∗ $9) (310)
Gross margin $170
Weighted average cost per unit = $ 525/55 units = $ 9.55

inventory?
Beginning inventory 10 ∗ $ 8.00 = $80

Feb 9 purchase 25 ∗ $ 9.00 = 225
Total 35 $305
Average cost = $305/35 = $ 8.71

Remaining units = 35 - 15 = 20
Units remaining Apr 15 20 ∗ $8.71 = 174.20

Feb 17 purchase 20 ∗ $11.00 = 220.00
Total 40 394.20
Average cost = $394.20/40 = $9.86

(20 units ∗ $11.00) + (10 units ∗ $9) = $310

Diff: 3 Type: ES
Objective 6-4
1) The lower-of-cost-and-net-realizable-value rule is a good example of conservatism in accounting.

Answer: TRUE
Diff: 2 Type: TF
Objective: 6-4 Apply the lower-of-cost-and-net-realizable-value rule to inventory
2) When applying the lower-of-cost-and-net-realizable-value rule to ending inventory valuation, net
realizable value generally refers to the company's expected selling price for its inventory net of any
selling costs.
Answer: TRUE
Diff: 2 Type: TF
3) When the sales value of the inventory subsequently increases after a write down to net-realizable-value
the reported value may be increased to the limit of the original cost.
Answer: TRUE
Diff: 2 Type: TF
4) Using the lower-of-cost-and-net-realizable-value rule of valuing inventory allows the accountant to

attain:
A) consistency.
B) conservatism.
C) matching.
D) full disclosure.
Answer: B
Diff: 2 Type: MC
5) If the cost of an item of inventory is $80 and the current selling price is $75, the amount shown in
inventory on the balance sheet under the lower-of-cost-and-net realizable-value rule is:
A) $75.
B) $80.
C) $155.
D) $75 or $80.
Answer: A
Diff: 2 Type: MC
6) Ending inventory for Commodity X consists of 20 units. Under the FIFO method, the cost of the 20
units is $5 each. Current net realizable value is $4.75 per unit. Using the lower-of-cost-and-net -realizable-
value rule to value inventory, the balance sheet would show ending inventory of:
A) $5.00.
B) $4.75.
C) $95.00.
D) $100.00.
Answer: C
Diff: 2 Type: MC
7) Piggly Wiggly Sales had six CD players in inventory on December 31. They were purchased in
November for $170 each. A quoted price received from the supplier on December 31 shows the CD
players now cost $175 each. Piggly Wiggly has marked each player to sell for $320. Using the lower-of-
cost-and-net-realizable-value rule, the ending inventory of CD players should be shown at:
A) $1,050.
B) $1,920.
C) $1,020.
D) $900.
Answer: C
Diff: 2 Type: MC
8) Piggly Wiggly Sales had six CD players in inventory on December 31. The players were purchased in
November for $170. Price lists from Piggly Wiggly Sales' supplier indicate that the same CD player
would now cost the company $168. The current sales price for each of the CD players is $320. Using the
lower-of-cost-and-net-realizable-value rule, the ending inventory of CD players should be shown at:
A) $1,008.
B) $1,035.
C) $1,020.
D) $1,920.
Answer: C
Diff: 2 Type: MC
9) For the current year, Heedy's Department Store reported the following data:
Goods available for sale $1,074,450

December 31, inventory balance 85,430
The current net realizable value of the inventory on the balance sheet date is $91,730. Using the lower-of-
cost-and-net-realizable-value rule, what is cost of goods sold for Heedy's Department Store?
A) $989,020
B) $982,720
C) $897,290
D) $1,080,750
Answer: A
Diff: 2 Type: MC
10) Given the following data:
Ending inventory at cost $23,600

Ending inventory at net realizable value 24,000
Cost of goods sold (before consideration of the
lower-of-cost-and-net-realizable-value rule) 37,000
Which of the following depicts the proper account balance after the application of the lower-of-cost-and-
net-realizable-value rule?
A) Ending inventory will be $24,000.
B) Cost of goods sold will be $37,000.
C) Cost of goods sold will be $57,600.
D) Ending inventory will be $23,600.
Answer: D
Diff: 2 Type: MC
11) Given the following data:
Ending inventory at cost $62,000

Ending inventory at net realizable value 61,000
Cost of goods sold (before consideration of the
lower-of-cost-and-net-realizable-value rule) 104,000
Which of the following depicts the proper account balance after the application of the lower-of-cost-and-
net realizable value rule?
A) Cost of goods sold will be $103,000.
B) Cost of goods sold will be $104,000.
C) Cost of goods sold will be $61,000.
D) Ending inventory will be $62,000.
Answer: A
Diff: 2 Type: MC
12) Williams Company had the following balances and transactions during 2013.
Beginning inventory 10 units at $70

June 10 Purchased 20 units at $80
December 30 Sold 15 units
December 31 Replacement cost $60
What would the company's inventory amount be on the December 31, 2013 balance sheet if the perpetual
FIFO method is used and the lower-of-cost-or-market-rule is applied?
A) $1,200
B) $900
C) $1,050
D) $1,100
Answer: B
Explanation: B) Calculations: 15 × $60 = $900
Diff: 3 Type: MC
13) The following data are available for Wood Products Company for 2013:

January 1 inventory at cost 110,600
Purchases 275,000
December 31 inventory at cost 98,000
The current net realizable value of the inventory on December 31 is $93,500. Compute gross margin for
Wood Products Company assuming the use of the lower-of-cost-and-net realizable value rule to value
ending inventory.
Answer: Sales revenue $400,500
Cost of goods sold
Beginning inventory $110,600
Purchases 275,000
Goods available for sale 385,600
Less: Ending inventory 93,500
Cost of goods sold 292,100
Gross margin $108,400
Diff: 2 Type: ES
14) Both accounting standards for private enterprises (ASPE) and international financial reporting
standards (IFRS) follow the lower-of-cost-and-net-realizable-value rule to value inventory when market
prices are changing. Explain how this relates to the accounting guideline of conservatism. Your answer
should include a discussion of both conservatism and 'lower of cost and net realizable value'.
Answer: The lower-of-cost-and-net-realizable-value rule requires companies to carry inventory at the
lower of historical cost and net realizable value where net realizable value is generally defined as the
expected selling price. Therefore, when market circumstances are such that the net realizable the
inventory declines below its cost, the value of the inventory is written down to reflect the decline in
value. If conditions change, the inventory write down may be reversed but only up to the original cost of
the inventory.
Accounting conservatism requires us to report items in the financial statements at amounts that lead to
the most cautious immediate results. With respect to assets this means that if doubt exists, the assets
should be recorded at the lowest reasonable amount. Users of financial statements would normally
expect inventory on the balance sheet to be sold at a price higher than its carrying value thus generating a
profit for the company. When the market value of the inventory has declined to below inventory cost it
would be misleading to not adjust the value of the inventory accordingly and would violate accounting
conservatism.
Diff: 3 Type: ES
15) The following selected transactions for Nova Scotian Tire occurred in October.
Date Description Units Unit Cost Unit Selling Price
Oct 1 Beginning Inventory 12 $164
1 Purchase 50 170
4 Sale 27 $270
Sale 23 270
Purchase 33 175
Sale 24 270
Purchase 31 190
30 Sale 24 280
1. Assuming that Nova Scotian Tire uses a perpetual inventory system, calculate cost of goods sold and
ending inventory using: a) FIFO b) Moving weighted average .
2. Assuming that Nova Scotian Tire uses a periodic inventory system, calculate cost of goods sold and
ending inventory using: a) FIFO b) Weighted Average .
3. Assuming that Nova Scotian Tire uses FIFO under a perpetual inventory system, calculate the gross
margin for the month of October.
4. Assuming that Nova Scotian Tire uses FIFO under a perpetual inventory system, prepare a journal to
record the October 30th sale on credit.
5. Nova Scotian Tire does a physical inventory count at the end of October and discovers 15 tires are
missing from inventory. Prepare a journal entry to adjust inventory, assuming the company uses
Weighted Average under a periodic inventory system.
Answer:
Perpetual: FIFO
COGS Ending Inventory
Units Cost Total Units Cost Total
12 164 $1,968.00
15 170 2,550
23 170 3,910
12 170 2,040
12 175 2,100
21 175 3,675
3 190 570 28 190 $5,320
98 $16,813.00 28 $5,320
Perpetual: Moving Weighted Average

27 168.84 $4,558.68
23 168.84 $3,883.32
24 173.36 $4,160.64
24 183.28 $4,398.72
28 183.28 $5,131.84
Rounded
98 $17,001.36 28 $5,131.64
Periodic: FIFO
12 164 $1,968.00
15 170 2,550
23 170 3,910
12 170 2,040
12 175 2,100
21 175 3,675
3 190 570 28 190 $5,320
98 $ 16,813.00 28 $5,320
Periodic: Weighted Average

98 175.66 $17,214.68 28 175.66 $4918.48
Rounded
98 $17,214.68 28 $4918.32
Sales $26,700.00
Cogs 16,813.00
Gross Margin $9,887.00
Date Account Titles and Explanations PR Debit Credit

Oct 30 A/R 6,720.00
Sales 6,720.00
COGS 4,245.00
Inventory 4,245.00
31 COGS 2,634.90
Inventory 2,634.90
15 ∗ 175.66 = 2,634.90
Diff: 3 Type: ES
Objective 6-5
1) Understating beginning inventory in 2012 will overstate net income for 2013.
Answer: FALSE
Diff: 3 Type: TF
Objective: 6-5 Measure the effects of inventory errors
2) Understating ending inventory in 2012 will overstate net income for 2013.
Answer: TRUE
Diff: 3 Type: TF
3) Overstating ending inventory in 2012 will overstate net income for 2013.
Answer: FALSE
Diff: 3 Type: TF
4) Overstating ending inventory in 2012 will understate net income for 2013.
Answer: TRUE
Diff: 3 Type: TF
5) Owners and managers of companies whose profits do not meet expectations are sometimes tempted to
"cook the books" by manipulating the value of ending inventory.
Answer: TRUE
Diff: 1 Type: TF
6) In a periodic inventory system, an overstatement of beginning inventory results in an overstatement of

gross margin.
Answer: FALSE
Diff: 3 Type: TF
7) Inventory at the end of the current year is overstated by $20,000. What effect will this error have on the
following year's net income?
A) Net income will be overstated $20,000.
B) Net income will be understated $20,000.
C) Net income will be correctly stated.
D) Net income will be understated $40,000.
Answer: B
Diff: 2 Type: MC
8) Two separate errors affected Satellite City in 2014. The beginning inventory was understated by
$28,000 and the ending inventory was understated by $43,000. Net income in 2014 will be:
A) understated by $15,000.
B) understated by $71,000.
C) understated by $43,000.
D) overstated by $15,000.
Answer: A
Diff: 3 Type: MC
9) Two separate errors affected Satellite City in 2013. The beginning inventory was understated by
$28,000 and the ending inventory was understated by $43,000. Net income in 2014 will be:
A) overstated by $15,000.
B) overstated by $43,000.
C) understated by $43,000.
D) understated by $71,000.
Answer: B
Diff: 3 Type: MC
10) Two separate errors affected Rollings Company in 2013. The beginning inventory was overstated by
$12,000 and the ending inventory was overstated by $18,000. Net income in 2013 will be:
B) overstated by $12,000.
C) overstated by $6,000.
D) understated by $6,000.
Answer: C
Diff: 3 Type: MC
11) Two separate errors affected Rollings Company in 2013. The beginning inventory was overstated by
$12,000 and the ending inventory was overstated by $18,000. Net income in 2014 will be:
B) understated by $18,000.
C) overstated by $18,000.
D) overstated by $6,000.
Answer: B
Diff: 3 Type: MC
12) If ending inventory for the current accounting period is overstated by $3,500:
A) net income for the current period will be overstated by $3,500.
B) ending inventory for the next period will be overstated by $3,500.
C) cost of goods sold for the current period will be overstated by $3,500.
D) owner's equity at the end of the next accounting period will be overstated by $3,500.
Answer: A
Diff: 2 Type: MC
13) If ending inventory for the current period is understated, then owner's equity will be:
A) overstated at the end of the current period and understated at the end of the next period.
B) understated at the end of the current period and overstated at the end of the next period.
C) overstated at the end of the current period, but it will be correct at the end of the next period.
D) understated at the end of the current period, but it will be correct at the end of the next period.
Answer: D
Diff: 3 Type: MC
14) If ending inventory for the current accounting period is understated by $4,700:
A) beginning inventory for the next period will be overstated by $4,700.
B) net income for the current period will be overstated by $4,700.
C) owner's equity at the end of the next accounting period will be understated by $4,700.
D) cost of goods sold for the current period will be overstated by $4,700.
Answer: D
Diff: 2 Type: MC
15) Determine the effect on cost of goods sold and net income for the current year of the following
inventory errors. Indicate your answer with either a + (overstated) or a - (understated).
Effect on Cost Effect on

Item Error of Goods Sold Net Income
1) Beginning inventory is
overstated.
2) Ending inventory is
understated.
understated.
overstated.
Answer:
Effect on Cost Effect on
Item Error of Goods Sold Net Income
+ -
overstated.
+ -
understated.
- +
understated.
- +
overstated.
Diff: 2 Type: SA
16) The bookkeeper for Duncan Company made an error in recording the year-end inventory balance on
December 31, 2013. As a result, ending inventory was understated by $37,000.
a) What effect will this error have on cost of goods sold, gross margin, net income, and owner's equity
in 2013?
b) As of December 31, 2014, what will be the cumulative effect of this error on owner's equity?
Answer:
a) Cost of goods sold will be overstated $37,000. Gross margin will be understated $37,000. Net income
will be understated $37,000. Owner's equity will be understated $37,000.
b) Owner's equity will be correct on December 31, 2014.
Diff: 3 Type: ES
17) The following data are available for three products of the Classic Company:
A B C
Beginning inventory $5,000 $20,000 $15,000
Purchases 45,000 65,000 62,000
Goods available for sale 50,000 85,000 77,000
Ending inventory 18,000 13,000 9,000
Cost of goods sold 32,000 72,000 68,000
You discover the following errors:

a) Ending inventory for product A was overstated by $6,000.
b) Ending inventory for product B was understated by $5,000.
c) Beginning inventory for product C was overstated by $3,000.
Considering these errors, recalculate cost of goods sold for each product.
Answer:
a) $50,000 - $12,000 = $38,000
b) $85,000 - $18,000 = $67,000
c) $74,000 - $9,000 = $65,000

Diff: 2 Type: ES
18) Delta Cleaning Supplies reported the comparative income statement for the years ended December
31, 2013 and 2014:
2014 2013
Sales revenue $82,500 $73,000
Cost of goods sold:
Beginning inventory 8,250 7,700
Net purchases 45,500 39,000
Cost of goods available 53,750 46,700
Ending inventory 11,800 8,250
Cost of goods sold 41,950 38,450
Gross margin 40,550 34,550
Operating expenses 18,200 15,750
Net income $22,350 $18,800
In the audit of the 2013 financial statements it was discovered that the ending inventory was actually
$10,050 and the beginning inventory was actually $6,500.
Required:
1. What adjustment to the 2013 owner's capital account is necessary?
2. Prepare a corrected income statement for 2014.
Answer:
1. The 2013 adjusted net income before taxes will be an increase of $3,000; therefore the owner's capital
will be increased by this amount.
2.
2014 2013
Sales revenue $82,500 $73,000
Cost of goods sold:
Beginning inventory 10,050 6,500
Net purchases 45,500 39,000
Cost of goods available 55,550 45,500
Ending inventory 11,800 10,050
Cost of goods sold 43,750 35,450
Gross margin 38,750 37,550
Operating expenses 18,200 15,750
Net income $20,550 $21,800
Diff: 3 Type: ES
Objective 6-6
1) An inventory count should be done at least once per year.

Answer: TRUE
Diff: 2 Type: TF
Objective: 6-6 Estimate ending inventory by the gross margin method and the retail method
2) The gross margin method is an estimate of inventory sometimes used to estimate losses for insurance
claims due to a fire or natural disaster.
Answer: TRUE
Diff: 1 Type: TF
3) To apply the retail method of estimating the cost of inventory the business must know both the total
cost and total selling price of its' net purchases.
Answer: TRUE
Diff: 3 Type: TF
4) The following data are for Fern's Florist Shop for the first seven months of its fiscal year:

Purchases 75,500
Net sales revenue 93,700
Normal gross margin percent 30%
What is the estimated ending inventory?

A) $38,700
B) $90,300
C) $65,590
D) $63,410
Answer: D
Diff: 2 Type: MC
Table 6-3
Cost Selling Price

Beginning inventory $50,400 $67,900
Purchases 128,500 170,600
Goods available for sale $178,900 238,500
Ending inventory at selling price (retail) $53,500
5) Referring to Table 6-3, in arriving at the estimated ending inventory at cost, using the retail method,
the retail ratio to be used is:
A) 75%.
B) 78%.
C) 133%.
D) 68%.
Answer: A
Diff: 2 Type: MC
6) Referring to Table 6-3, the estimated ending inventory at cost, using the retail method, is:
A) $36,380.
B) $39,050.
C) $71,155.
D) $40,125.
Answer: D
Diff: 2 Type: MC
7) Using the gross margin method, find the ending inventory value when purchases were $105,000, net
sales revenue was $128,000, beginning inventory was $31,000 and cost of goods sold historically runs 58%
of net sales revenue.
A) $82,240
B) $61,760
C) $8,000
D) $6,090
Answer: B
Diff: 2 Type: MC
8) Bathworks Company wants to estimate its ending inventory based on the following data: beginning
inventory of $70,000, net sales revenue of $195,000, purchases of $140,000, and a normal gross margin
percent of 40%. Ending inventory is equal to:
A) $78,000.
B) $117,000.
C) $93,000.
D) $132,000.
Answer: C
Diff: 2 Type: MC
9) Assume a beginning inventory of $28,000, ending inventory of $47,000, and purchases of $110,000. If
the gross margin percent is 60%, how much is net sales revenue?
A) $168,333
B) $101,000
C) $252,500
D) $227,500
Answer: D
Diff: 2 Type: MC
10) Callahan Computers stores its inventory in a warehouse that burned to the ground in late November,
2012. Their sales office was at a different location. In order to file a claim with their insurance, the owners
ask you to estimate the inventory in the warehouse. The following information is available:

Purchases through November 30 470,250
Net sales revenue through November 31 793,000
The company's gross profit has historically been 40% of Net sales revenue. Estimate the value of the
inventory destroyed in the fire using the gross profit method.
A) $369,950
B) $528,550
C) $410,000
D) $388,450
Answer: A
Explanation: A) Calculations: $375,500 + $470,250 - (60% × $793,000) = $369,950
Diff: 2 Type: MC
Match the following.
A) gross profit
B) consistency characteristic
C) gross margin method
D) retail method
E) market value
F) perpetual inventory system
G) materiality
H) weighted average
I)long-term asset
J) net realizable value
K) specific-unit-cost method
L) conservatism
M) disclosure principle
N) lower-of-cost-and-net realizable-value rule
O) FIFO
P) gross margin percentage
Q) periodic inventory system
R) current asset
11) Inventory cost method based on the specific cost of particular units of inventory
Diff: 1 Type: MA
12) Another name for gross margin

Diff: 1 Type: MA
13) Inventory costing method in which ending inventory is based on the costs of the most recent
purchases
Diff: 1 Type: MA
14) Inventory system maintaining a continual count of inventory

Diff: 1 Type: MA
15) Inventory system sometimes referred to as the physical system because it relies on the actual physical
count of inventory
Diff: 1 Type: MA
16) Inventory cost method that will result in the same value for ending inventory using either a perpetual
or periodic inventory system
Diff: 1 Type: MA
17) Principle that allows the financial statement user the ability to know which of the cost methods is
being used in valuing inventory
Diff: 1 Type: MA
18) A principle requiring the financial statements to report enough information for outsiders to make
knowledgeable decisions about the business
Diff: 1 Type: MA
19) A concept by which the least favourable figures are presented in the financial statements
Diff: 1 Type: MA
20) A characteristic requiring the use of the same accounting methods and procedures from period to
period
Diff: 1 Type: MA
21) Accounting concept that states that a company must perform strictly proper accounting only for items
that are significant to the business's financial statements
Diff: 1 Type: MA
22) The accounting principle that discourages managers from manipulating income by changing from one
inventory method to another
Diff: 1 Type: MA
23) A rule that requires an asset be reported in the financial statements at whichever is lower, its historical
cost or its net realizable value
Diff: 1 Type: MA
24) The selling price less the cost of disposition

Diff: 1 Type: MA
25) The classification of inventory on the balance sheet.

Diff: 1 Type: MA
26) One of two methods used to estimate ending inventory

Diff: 1 Type: MA
27) A method of estimating ending inventory based on the total cost and total selling price of opening
inventory and net purchases
Diff: 1 Type: MA
28) The relationship of gross margin to net sales.

Diff: 1 Type: MA
Answers: 11) K 12) A 13) O 14) F 15) Q 16) O 17) M 18) M 19) L 20) B 21) G 22) B 23) N
24) J 25) R 26) C 27) D 28) P
29) Late on the night of September 30, 2017, an arsonist destroyed the Lampkin Company warehouse,
which was full of inventory. Luckily the accounting records were stored in another facility and not
destroyed in the fire. Lampkin Company is in the process of filing a claim with its insurance company for
the inventory loss due to the fire.

Purchases through September 30, 2017 470,250
Net sales revenue through Sept. 30, 2017 745,200
The gross margin percent has historically been 40% of net sales revenue.
Estimate the value of the inventory destroyed in the fire using the gross margin method.
Answer: Beginning inventory $350,500
Purchases 470,250
Cost of goods available for sale $820,750
Less: Cost of goods sold * 447,120
Ending inventory $373,630
*Cost of goods sold = $745,200 × 60% = $447120

Diff: 2 Type: ES
30) The inventory of Runners Company was destroyed by flood on Jun 1. From an examination of the
accounting records, the following data for the first five months (Jan to May) of the year are obtained:
Sales $55,000
Sales Returns and Allowances 2,000
Purchases 34,500
Freight-In 1,000
Purchase Returns and Allowances 1,400
Required:
Determine the merchandise lost by flood using the Gross Profit Method, assuming a beginning inventory
of $3,000 and a gross profit rate of 40% on net sales.
Answer:
Est. GAFS = Beg. Inv + Purchases - Pur. Ret. + Fr
= 3,000 + 34,500 - 1,400 + 1000 = 37,100
Net sales = 55,000 - 2000 = 53,000
Est. COGS = (1 - 40%) × 53,000 = 31,800
Est. ending inventory = 37,100 - 31,800 = 5,300

Diff: 3 Type: ES
31) Aardvark Novelty Sales has the following information available:
Selling
Cost Price
Purchases 252,000 360,000
Net sales 348,000
Required:
Estimate the value of the ending inventory using the Retail Method.
Answer: Selling
Cost Price
Purchases 252,000 360,000
Goods available for sale $327,600 $468,000
Net sales 348,000
Ending inventory at retail $120,000
Ending inventory at cost ($120,000 × 70%) $84,000
Retail ratio = $327,600/$468,000 = 70%

Diff: 3 Type: ES
Objective 6-7
1) The treatment of inventories under accounting standards for private enterprises (ASPE) is significantly
different than for companies reporting under international financial reporting standards (IFRS).
Answer: FALSE
Diff: 2 Type: TF
Objective: 6-7 Assess the inventory recording and reporting impacts of IFRS
2) For companies reporting under international financial reporting standards (IFRS), it is possible to value
inventory higher than its original cost.
Answer: FALSE
Diff: 2 Type: TF
3) There are more acceptable inventory costing methods under international financial reporting rules
(IFRS) than there are under accounting standards for private enterprise (ASPE).
Answer: FALSE
Diff: 2 Type: TF
4) The lower-of-cost-or-net-realizable-value rule does not apply to Canadian companies reporting under
the accounting standards for private enterprises (ASPE).
Answer: FALSE
Diff: 2 Type: TF
5) The same three inventory costing methods that are permitted under accounting standards for private
enterprises (ASPE) are allowed under international financial reporting standards (IFRS). Specifically these
include:
A) specific unit, FIFO and weighted-average.
B) random unit, FIFO and weighted-average.
C) specific unit, LIFO and weighted-average.
D) specific unit, FIFO and average.
Answer: A
Diff: 2 Type: MC
6) Which of the following is not a main issue in accounting for inventory under both accounting
standards for private enterprises (ASPE) and international financial reporting standards (IFRS)?
A) costs to include in inventory
B) inventory costing method to use
C) competitor pricing of similar inventory
D) value of inventory when market value has fallen below cost
Answer: C
Diff: 2 Type: MC
7) Which of the following costing methods is not acceptable under the international financial reporting
standards (IFRS)?
A) LIFO
B) FIFO
C) weighted average
D) specific identification
Answer: A
Diff: 2 Type: MC
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of thermic fever,
396
of thrombosis of cerebral veins and sinuses,
988
of torticollis,
463
of tremor,
432
of tubercular meningitis,
735
of tumors of brain,
1066
of tumors of spinal cord,
1106
of unilateral spinal paralysis,
1168
of vaso-motor neuroses,
1255
of vertigo,
426
of writers' cramp,
533
REMOR
429
Etiology,
429
Symptoms,
430
Treatment,
432
Tremor, ataxic, in nervous diseases,
47
hysterical,
244
in alcoholism,
620
in delirium tremens,
628
in disseminated sclerosis,
875
876
in nervous diseases,
45
in paralysis agitans,
434-436
in spinal syphilis,
1025
in the chloral habit,
664
in the opium habit,
655
658
659
in writers' cramp,
518
muscular, in general paralysis of the insane,
195
of sclerotic affections, treatment,
905
Trephining, question of, in abscess of the brain,
800
in cerebral hemorrhage and apoplexy,
977
in epilepsy,
503
in tumors of the brain,
1066
1067
Trismus,
549
563
Trophic changes in injuries to peripheral nerves,
1183
,
1187
disturbances in tumors of the brain,
1044
in writers' cramp,
520
of tabes dorsalis,
837
lesions in infantile spinal paralysis,
1145
nerve-centres,
1266
1275
T
ROPHIC
EUROSES
1266
Atrophy
1260
of glandular and cutaneous systems,
1268
of muscles and bones,
1267
Wallerian degeneration,
1266
Hypertrophy
1271
Inflammation
1273
Bed-sores, acute and chronic,
1274
1275
Ulceration of fingers, acute,
1273
Ulceration, perforating, of the foot,
1273
1274
Myxœdema
1271
Course and symptoms,
1272
Etiology and pathology,
1271
Diagnosis,
1273
Treatment,
1273
Electricity and tonics,
1273
Nitro-glycerin,
1273
Trophic Nerves and Nervous Centres
1266
Symptoms of nervous diseases,
54-59
of neuritis,
1192
Tubercles, miliary, seat and character, in tubercular meningitis,
730
732
Tubercular brain tumors,
1048
meningitis (see
Meningitis, Tubercular
),
723
in the adult,
737
simulated by cerebral anæmia,
786
Tumor of spina bifida, size, characters, etc.,
758
UMORS OF THE
RAIN AND ITS
NVELOPES
1028
Complications and sequelæ,
1045
Definition,
1028
Diagnosis,
1051
from cerebral abscess,
1052
from cerebral symptoms of Bright's disease,
1053
from chronic hydrocephalus and softening,
1054
from dementia and mania,
1054
from early stage of posterior spinal sclerosis,
1055
from hysteria and malaria,
1055
from meningitis,
1053
from various forms of apoplexy,
1052
Localization of tumors of brain,
1056-1066
Duration, course, and termination,
1045
Etiology,
1028
Age and sex, influence of,
1029
Echinococci and cysticerci, influence of,

1030
Heredity, influence of,
1028
Injuries, influence of,
1029
Syphilis, influence of,
1028
Pathology,
1046
Methods of making post-mortem examination in cases of brain

tumors,
1050
Varieties, structure, seat, and frequency,
1046-1050
Prognosis,
1066
Symptoms,
1030
Apoplectic attacks in,
1040
Ataxia and muscular atrophy in,
1030
1041
Bladder, disorders of,
1045
Choked disc, neuro-retinitis and optic retinitis in,
1035
Chorea and choreic movements,
1039
Constipation in,
1045
Contractures and rigidity in,
1030
1039
Epistaxis and hemorrhages from mucous surfaces in,
1044
Eye, disorders of,
1030
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Intermediate Accounting Volume 1 Canadian 10th Edition

Horngrens Accounting The Managerial Chapters 10th

Horngrens Accounting The Financial Chapters 10th

1) All balance sheets have inventory listed as an asset.

6) It is necessary to do a physical count of inventory when using a perpetual inventory system.

14) A FIFO perpetual inventory system:

15) Inventory is classified:

16) A perpetual inventory system:

Sales revenue 100 units at $10 per unit

Assume the following data for Burnette Sales for 2014:

Beginning inventory 10 units at $7 each

On December 31, a physical count reveals 15 units on hand.

Table 6-6 Sam's Wholesale Bikes

January 1 inventory balance 15 units at $350 per unit

Cost of goods sold = $14,769 + $27,754 = $ 42,523

Date Description Units Unit Cost Unit Selling Price

Jan.1 Beg. Inventory 10 $50

Ending inventory: 11 × $55 = $605

Date Item Units Amount

2. Total units = 26 + 65 + 38 + 40 = 169

Beginning inventory Nov. 1 5 units at $90 each

On November 30, a physical count reveals 6 units on hand.

Nov. 1 5 90 450 5 90 450

Nov. 1 5 90 450 5 90 450

Cost of goods sold:

Nov. 1 5 90 450 5 90 450

Ending inventory 570

Nov. 1 5 90 450 5 90 450

Ending inventory 570

Cost of goods sold:

May 1 Beginning inventory was 20 units valued at $25 per unit.

Date Account Name Debit Credit

May 9 Inventory 240

May 10 Accounts Payable 54

May 11 Accounts Receivable (30 × $50) 1,500

May 15 Accounts Payable ($2,160 - $54) 2,106

May 20 Accounts receivable 500

Cost of Goods Sold (10 × $30) 300

Date Account Name Debit Credit

May 9 Freight-in 240

May 10 Accounts Payable 54

May 11 Accounts Receivable 1,500

May 15 Accounts Payable 2,160

May 20 Accounts Receivable 500

Date Units $/Unit Total

Units available 190

Average cost = $6,900/190 = $36.32

Ending inventory = 20 units * $36.32 = $726.40

Aug 10th COGS = ∗ 100 = $3,300.00

Aug 22nd COGS = ∗ 70 = 2,800.00

Units available to sell 55

Sales [(15 ∗ $15) + (10 ∗ $16)] = $385

Feb 15 sale weighted average:

Beginning inventory 10 ∗ $8.00 = $80

Average cost = $305/35 = $ 8.71

Feb 25 sale weighted average:

Units remaining Apr 15 20 ∗ $8.71 = 174.20